A debit card is a card you can make payments with. Money is automatically deducted from your current account (known as a current account in many places, but also known as a checking account).
Debit cards allow contactless payments, which further disincentivise the need to carry cash around nowadays. You can tell if your card supports contactless payment methods if you see a symbol that looks like a WiFi signal on its side. Simply tap your card against a stall’s Point-of-Sale (POS) machine to use this payment method. Money will be automatically deducted from your account. Considering the prevalence of contactless payment methods, they are generally secure. However, no technology is entirely infallible: If you still prefer to pay for goods or services with cash, then use a debit card to withdraw money from an ATM.
Since the debit card is directly linked to your current account, you are prevented from spending more than your available balance. In some exceptional cases, the bank may allow you to withdraw more than what you actually have, which is to say, your account would be overdrawn. If this is the case, you would have to pay overdraft fees.
You should note the difference between arranged and unarranged overdrafts: arranged overdrafts are agreed upon by both you and your bank. In contrast, unarranged overdrafts will occur if you spend more than what is in your account or spend beyond your previously agreed upon arranged overdraft limit.
Fees will differ for each kind of overdraft. In many countries, banks are heavily dependent on overdraft fees, making up a lot of their revenue; using debit cards carelessly is reportedly one of the most common ways customers fall into that treacherous hole.
But banks can often be sneaky when it comes to getting their hands on those lucrative fees. One method that banks utilise is reordering transactions, where banks post larger balances first so that funds deplete faster. Your overall balance may become insufficient, resulting in you having to pay more fees.
Also, remember that a deposit into your account may not be immediately credited. You can still be charged an overdraft fee if you deposit money but withdraw more than what was available without waiting for the deposit to go through.
Generally, however, you will not incur fees from using your debit card unless you withdraw cash from an ATM that does not belong to your bank’s network.
When purchasing with your debit card, you may or may not need to enter your Personal Identification Number (PIN), depending on the type of cashless payment you choose.
For example, when paying by NETS, you will have to enter your PIN into the POS machine, but not with VISA’s payWave.
There are a variety of cashless payment options for debit cards, making your purchases much more convenient!
Daily transaction limits can be set to control your spending, but this may be unsuitable if you wish to use your debit card for big-ticket purchases. You may want to use a credit card for such purchases. Most credit cards offer purchase protection policies, while debit cards do not. These policies will come in handy if your purchased item becomes faulty and your manufacturer warranty has expired, or your item is lost/stolen.
But keep track of how many big purchases you make each month! Any non-essential big purchases should come from the discretionary portion of your budget - or the “30%” of the “50-30-20” rule. When it comes to budgeting, we recommend the ‘pay yourself first’ rule, which emphasises putting savings and investments (i.e. the “20%") first.
Besides being better for big-ticket purchases, credit cards may also offer more rewards. However, in return, higher fees are charged to merchants accepting credit cards (compared to accepting debit cards) and there are various fees charged to users. It is also worth noting that some debit cards are linked to certain brands with more rebates for users who spend a lot!
If you feel that the less “generous” rewards attached to a debit card are a big disadvantage, remember that credit cards come with their own drawbacks. It is much easier to accumulate all kinds of fees with credit cards. Suppose you’re constantly paying late payment fees, cash advance fees, or rolling over balances and potentially incurring huge interest charges. In that case, you should consider changing to a debit card.
At its core, a credit card is a form of borrowing. Since cashless payment options offer so much convenience, it may be easy to underestimate the true amount of your spending. Both credit and debit cards offer cashless payments, but when using a debit card, you are spending money that you have, rather than money that needs paying back at a future date! This way, you can also avoid the debt created when you overspend on a credit card.
However, since funds are deducted directly from your account when using a debit card, your purchases and payment history will not improve your credit score (unlike credit cards). Paying everything on time with a credit card will improve your credit rating and make you more eligible for taking out loans.
An MIT study found that a customer’s willingness to pay could increase up to 100% when using a credit card compared to using cash. Since using a debit or credit card is convenient, the customer does not feel the sting of spending more money than cold hard cash. A study published in the Journal of Applied Psychology also found that when presented with a cue to use a credit card, diners would tip an average of 4.3% more. Without going into the details of the psychology involved here, we will simply advise that you consider using cash more frequently, especially to pay for smaller purchases.
Since it’s relatively easy to open a current account, you will most likely use the debit card that comes with the account if you’re a student or fresh graduate. Credit cards usually have a tedious application process with credit checks and minimum spending amounts. If you are unlikely to get past these checks (often young adults), then debit cards may be best for you.
If you lack discipline with your spending, you might want to consider getting a debit card. If you’re a shopaholic, this could be especially applicable if there’s a debit card linked to a specific chain you frequently shop at! This would enable both daily transaction limits and the ability to earn rebates, getting the best of both worlds.
Just as you keep your money and bank account details safe, you should take extra precautions when storing your debit card, its documents, and your PIN number. You should also be wary of the risks associated with the convenience of cashless payments:
Debit cards are a very convenient way of paying for your needs. However, this convenience can lead to overspending compared to using cash. Although overdraft fees can be incurred with a debit card, credit cards have potentially much more ruinous effects (e.g. snowballing debt with compounding interest charges). The key is to use both types of cards sensibly. If you get into trouble with credit cards, use a debit card and keep a close eye on your balances at the time of spending. Either way, spend less than you earn by budgeting well!
DEBIT CARDS 101. COMPLETED. ✅
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